A swathe of state pensioners face paying tax to HMRC and the new Labour Party government under new uprated state pension rates from April. The New and Basic State Pensions will rise by 4.1 per cent from April while additional elements are set to increase by 1.7 per cent.
The Personal Allowance will remain frozen at £12,570 until the start of the 2028/29 financial year. The full New State Pension is currently worth £11,502 in the 2024/25 tax year and will rise to £11,973 in 2025/26. This leaves just £1,068 in the current year before the tax threshold is exceeded and £597 in 2025/26.
The most important thing to remember is that someone on the full New State Pension will not pay income tax, but older people with additional income through employment, private or workplace pensions, might need to pay tax.
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For most people, this would be paid automatically through PAYE on employment and tax on private pensions. Anyone who doesn’t pay tax automatically pays tax through deductions, would receive a tax bill from HMRC the following summer to be paid by January in the next year.
The Department for Work and Pensions (DWP) does not operate Pay As You Earn (PAYE) on your state pension – so you receive it gross, without any tax collected at source before it is paid to you. If the state pension is your only source of income, it might be less than your tax-free allowances. This means you do not have to pay any tax on it.
If your state pension is more than your tax-free allowances, or if you have other income sources that take your total income above your allowances, you might need to pay tax. There are a few ways that tax might be collected on your state pension, depending on your circumstances.